The dynamics for LNG carriers have changed and the cyclical inflection point is definitively behind us as spot rates surge towards levels not seen in three years. We see utilization rising steadily towards the end of this decade, with corresponding improvements in earnings, vessel values and share prices. We reiterate our BUY recommendation on LNG carriers and highlight Flex LNG (TP 18) and GasLog (TP 22) as our top picks.
Estimate changes: Net supply YTD has been lower than our expectations, but we believe many of these vessels have slipped into 2018. We forecast supply growth of 7.1% (from 8.2%) in 2017E, 11.3% (10.9%) in 2018E and 8.0% (7.5%) in 2019E. Our demand forecast for 2017E is more or less unchanged at 13%, with 2018E at 14% (13%) and 2019E at 12% (15%). This increases the front-end of the utilization curve, with 2017E at 77% (76%) and 2018E at 80% (78%), representing spot rates (TFDE 160k cbm basis) of USD 46k/d (42k/d) and USD 52k/d (46k/d), respectively.
Key investment opportunities: We forecast avg. TCE across our peers at USD 62.7k/d in 4Q vs consensus at 49.8k/d. Thus, we expect a positive share price momentum from analyst’s upgrades ahead of next reporting season. Looking further, we expect a return to the USD 40s (TCE/d) in 1H18E due to demand seasonality and a surge of newbuildings hitting the water. Thus, we advise investor to stay long the sector and use any potential weakness in share prices to increase exposure ahead of significant upside towards the end of this decade. Our top picks remain Flex LNG and GasLog